IP Update, Vol. 21, No. 8

En Banc Federal Circuit: § 145 Appellants Do Not Have to Pay (Attorneys’ Fees) to Play

The en banc US Court of Appeals for the Federal Circuit held that a dissatisfied patent applicant that chooses to appeal from a decision of the Patent Trial and Appeal Board rejecting claims of a patent application can appeal to the US District Court of the Eastern District of Virginia without fear of being required to pay the prorated salaries of US Patent and Trademark Office (PTO) employees who work on the appeal, regardless of the outcome. NantKwest, Inc. v. Iancu, Case No. 2016-1794 (Fed. Cir. July 27, 2018) (en banc) (Stoll, J, joined by Newman, Lourie, Moore, O’Malley, Wallach and Taranto, JJ) (Prost, CJ, dissenting, joined by Dyk, Reyna and Hughes, JJ).

NantKwest filed a complaint against the director of the PTO in the Eastern District of Virginia pursuant to 35 USC § 145, appealing from the PTO’s rejection of its patent claims. After the district court affirmed the PTO’s decision, the PTO filed a motion for reimbursement of “[a]ll the expenses of the proceedings,” including its attorneys’ fees in the form of the prorated salaries of the PTO personnel who worked on the appeal. Section 145 states that “[a]ll the expenses of the proceedings shall be paid by the applicant.” The district court denied the PTO’s motion for attorneys’ fees because the American Rule provides that each party should pay its own attorneys’ fees. The PTO appealed the denial, and a divided Federal Circuit panel reversed the district court. The Federal Circuit panel held that § 145 was a deviation from the American Rule and attorneys’ fees were included in “[a]ll the expenses of the proceedings” (IP Update, Vol. 20, No. 7). The Federal Circuit next issued a sua sponte order to hear the appeal en banc and vacated the panel decision.

Under § 141, dissatisfied applicants may appeal directly to the Federal Circuit, the most routinely used path for appeal. But applicants also may use § 145 and seek review in the Eastern District of Virginia through the filing of a civil action. In such an action, the parties can conduct discovery and introduce new evidence, including oral evidence that was not presented to the PTO during prosecution. These § 145 actions are resolved under the same methods as traditional district court proceedings, such as motion practice and a trial on the merits. Unlike § 141 appeals, in § 145 proceedings, the applicant must pay “[a]ll the expenses of the proceedings.” Ever since the predecessor statute of § 145 was passed in the mid-1800s, these expenses have included travel, expert and court reporter fees, and document production costs—but never attorneys’ fees.

The en banc Federal Circuit ruled that the American Rule applies and the language of § 145 is not specific and explicit enough to be interpreted as including attorneys’ fees. The en bancCourt held that “the American Rule prohibits courts from shifting attorneys’ fees from one party to another absent a ‘specific and explicit’ directive from Congress. The phrase ‘[a]ll the expenses of the proceedings’ falls short of this stringent standard.”

Practice Note: This case may be heading to the Supreme Court of the United States because the decision in NantKwest creates a split between the Fourth Circuit and the Federal Circuit in the interpretation of similar statutes (15 USC § 1071 (b) and 35 USC § 145) as to whether the American Rule applies and what is included in “all the expenses of the proceeding(s)” for appeals to a district court. Compare Shammas v. Focarino, 784 F.3d 219, 223–24 (4th Cir. 2015) with the NantKwest decision.

Tribal Immunity Does Not Apply to IPR Proceedings

The US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB) finding that tribal immunity does not apply to inter partes review (IPR) proceedings. Saint Regis Mohawk Tribe v. Mylan Pharmaceuticals, Inc., et al., Case Nos. 18-1638, -1639, -1640, -1641, -1642, -1643 (Fed. Cir. July 20, 2018) (Moore, J).

The appeal stems from a multi-front dispute between Allergan and various generic drug manufacturers regarding patents related to Allergan’s Restasis product, a treatment for alleviating the symptoms of chronic dry eye. In 2015, Allergan sued the generic drug manufactures in the Eastern District of Texas, alleging infringement of its Restasis patents based on their filings of abbreviated new drug applications. In 2016, Mylan petitioned for IPR of Restasis patents, and the other generic drug manufacturers subsequently filed similar petitions. The PTAB instituted IPR and scheduled a consolidated oral hearing for September 2017.

Less than one week before the oral hearing, Allergan transferred certain patents relating to its Restasis product to the Saint Regis Mohawk Tribe. Allergan moved to withdraw, and the Tribe moved to terminate the IPR proceedings, asserting tribal sovereign immunity. In February 2018, the PTAB denied both motions (IP Update, Vol. 21, No. 3). The Tribe and Allergan appealed.

On appeal, the Tribe argued that tribal immunity applies to IPR proceedings under the Supreme Court of the United States’ 2002 decision in Fed. Maritime Comm’n v. S.C. State Ports Auth. (FMC). In FMC, the Supreme Court considered whether state sovereign immunity precluded the Federal Maritime Commission from “adjudicating a private party’s complaint that a state-run port ha[d] violated the Shipping Act of 1984.” In answering the question, the Supreme Court asked whether Commission adjudications “are the type of proceedings from which the Framers would have thought the States possessed immunity when they agreed to enter the Union.” In finding that sovereign immunity applied, the Supreme Court recognized the distinction between adjudicative proceedings brought against a state by a private party, where sovereign immunity applies, and agency-initiated enforcement proceedings, where sovereign immunity does not apply.

In the case at hand, the Tribe argued that tribal immunity applies in IPR proceedings under FMC because an IPR is a contested adjudicatory proceeding between private parties in which the petitioner, not the US Patent and Trademark Office, defines the contours of the proceeding. The generic drug manufacturers disagreed, arguing that IPR proceedings are more like traditional agency actions because the PTAB is not adjudicating claims between parties, but instead is reconsidering a grant of a government franchise.

The Federal Circuit rejected the Tribe’s argument, finding that tribal immunity does not apply to IPR proceedings. The Court noted that IPR proceedings are neither clearly a judicial proceeding instituted by a private party nor clearly an enforcement action brought by the federal government. However, the Court found that IPR proceedings are more akin to an agency proceeding for the following reasons:

• The government has broad discretion in deciding whether to institute an IPR proceeding.
• The government may choose to continue an IPR proceeding once instituted even if the petitioner chooses not to participate.
• IPR procedures are different than the Federal Rules of Civil Procedure.
• Congress did not contemplate that tribal immunity would apply to IPR proceedings.

Given these findings, the Court affirmed the PTAB’s decision that tribal immunity does not apply.

Practice Note: The Federal Circuit’s decision is limited to tribal immunity. The Court recognized that there are many parallels between sovereign immunity and tribal immunity, but left for another day the question of whether there is any reason to treat state sovereign immunity differently.

No Bright Line for Determining Real Parties in Interest

Addressing whether an inter partes review (IPR) petition was time barred under 35 USC § 315(b), the US Court of Appeals for the Federal Circuit vacated and remanded a finding by the Patent Trial and Appeal Board (PTAB) that the petitioner was not a real party in interest to the entity that had been served with an infringement complaint in district court more than one year earlier. Applications in Internet Time, LLC v. RPX Corp., Case Nos. 17-1698, -1699, -1701 (Fed. Cir. July 9, 2018) (O’Malley, J) (Reyna, J, concurring).

Applications in Internet Time (AIT) sued Salesforce.com, a software company, for patent infringement. Salesforce was served with a copy of the complaint on November 20, 2013.

Salesforce is a client of RPX Corporation, which helps its clients extricate themselves from lawsuits filed by non-practicing entities. One way in which RPX assists its clients is assessing the validity of asserted or potentially asserted patents, and if warranted, filing IPRs on those patents. RPX has a set of best practices to “ensure that RPX is and will be deemed by the PTAB and district courts as the sole real party-in-interest in all validity challenges unless another real party-in-interest is expressly identified.”

On August 17, 2015—more than one year after Salesforce was served with a copy of ATI’s complaint—RPX filed three IPR petitions challenging the validity of the asserted patents. In each petition, only RPX was identified as the real party in interest. ATI objected to the timeliness of the petitions, alleging that Salesforce should have been listed as a real party in interest, and on that basis, that the petitions would have been untimely. The PTAB allowed discovery into the issue, but ultimately concluded that although Salesforce communicated with RPX about the district court litigation and paid membership fees to RPX, there was no evidence showing that Salesforce exerted control over or paid RPX to file these particular IPRs. After the PTAB’s final decisions invalidated the challenged patents, ATI appealed the PTAB’s determination that Salesforce was not a real party in interest to RPX’s petition.

The Federal Circuit vacated and remanded, finding that the PTAB applied an impermissibly narrow real-party-in-interest test, focused too intently on whether Salesforce had control over or a financial interest in the IPRs. It also found that the PTAB failed to adequately consider and account for all of the record evidence and misallocated the burden of proof. The Federal Circuit suggested a number of factual and legal theories that the PTAB should have considered, including a theory that RPX simply acted as a proxy for Salesforce.

Judge Reyna wrote separately to point out an independent ground for vacating the PTAB’s decision, namely that it failed to address whether RPX was also a “privy” of Salesforce. A petitioner is time barred under § 315(b) from filing a petition more than one year after the “petitioner, the real party in interest, or privy of the petitioner is served with a complaint.” Judge Reyna explained that a number of additional factors must be considered to determine privity, including whether a legal relationship exists between the parties or whether one party acted as a proxy/representative for the other party. In the case of RPX and Salesforce, a contractual relationship existed, and RPX may have been acting as Salesforce’s proxy. Therefore, Judge Reyna would have instructed the PTAB to also thoroughly review whether RPX and Salesforce were in privity in these circumstances.

When SCOTUS Said No Partial Institution, It Meant All Challenged Grounds

In light of the Supreme Court of the United States decision in SAS Institute v. Iancu (IP Update, Vol. 21, No. 5), the US Court of Appeals for the Federal Circuit remanded an appeal from the Patent Trial and Appeal Board (PTAB), finding that institution decisions must institute not only on all challenged claims, but also on all challenged grounds. Adidas AG v. Nike, Inc., Case Nos. 18-1180, -1181 (Fed. Cir. July 2, 2018) (Moore, J).

Adidas sought inter partes review (IPR) of two of Nike’s patents, arguing that (1) each challenged claim would have been obvious based on the Reed and Nishida references, and (2) each claim would have been obvious based on the Castello, Fujiwara and Nishida references. The PTAB instituted the IPR but limited its institution to the first asserted grounds of invalidity. In its the final written decision, the PTAB held that Adidas failed to carry its burden with respect to the first asserted ground, but never addressed the petitioner’s second asserted grounds. Adidas appealed the final written decision and, following the Supreme Court’s decision in SAS, promptly moved to remand to the PTAB for consideration of the second asserted ground.

In remanding the case to the PTAB, the Federal Circuit noted that in SAS, the Supreme Court held that the institution decision must be “in accordance with or in conformance to the petition,” meaning that it must address all challenged claims and all grounds on which the challenge to each claim is based. The Supreme Court also explained that its decision applied to all pending IPRs at the time of the decision. The Federal Circuit then cited numerous cases decided since SAS that remanded appeals from IPR proceedings where motions to remand in light of SAS were promptly filed. Since the motion to remand in this case was prompt, and therefore not a waiver, the PTAB’s failure to institute on all challenged grounds mandated remand.

Practice Note: Be sure to immediately raise the issue of the PTAB’s failure to institute on all claims or all grounds the moment the mistake is identified. Failure to act promptly, even at the institution stage, may soon be held to result in a waiver of correcting the institution decision in favor of expediency.

Printed Publication Status Based on Public Accessibility

Addressing public accessibility of prior art, the US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB) obviousness decision, finding that widely disseminated materials available on the US Food and Drug Administration (FDA) website were publicly accessible to a pharmacist exercising reasonable diligence, and thus constituted a “printed publication.” Jazz Pharmaceuticals, Inc. v. Amneal Pharmaceuticals, LLC, Case Nos. 17-1671, -1673, -1675, -1676, -1677, -2075 (Fed. Cir. July 13, 2018) (Lourie, J).

Jazz Pharmaceuticals owns several patents relating to a drug distribution system for tracking prescriptions of sensitive drugs such as Xyrem^®. During the regulatory review process, the FDA published a Notice in the Federal Register about an advisory committee meeting and provided a hyperlink to its website where information relating to Xyrem’s approval would be posted. The FDA subsequently posted Xyrem’s materials, such as the meeting transcript and slides, preliminary clinical safety review data, the briefing booklet and the proposed distribution system. These materials are collectively referred to as the ACA materials.

Amneal Pharmaceuticals petitioned for inter partes review (IPR) of Jazz’s patents based on the ACA materials. The threshold issue before the PTAB was whether the ACA materials were publicly accessible and whether one of ordinary skill in the art, exercising reasonable diligence, would have been able to locate them. The PTAB found that the ACA materials were publicly accessible on the FDA website listed in the Notice more than two months prior to the critical date of the Jazz patents. The PTAB also found that a pharmacist, aware that Xyrem’s active ingredient (γ-hydroxybutyrate) could potentially be abused as a “date-rape drug,” would have had sufficient motivation to locate the FDA Notice and the ACA website. The PTAB held that the ACA materials were prior art to Jazz’s patents, and found the challenged claims obvious. Jazz appealed.

The Federal Circuit affirmed the PTAB’s decision, finding that the ACA materials were publicly accessible to a pharmacist or a computer scientist. The Court found that announcement of the ACA meeting was widely disseminated through a Notice in the Federal Register, that the meeting was open to the public, that the ACA materials on the website were accessible via the link, and that the Notice provided specific instructions on how to access those materials. The Court rejected Jazz’s argument that the ACA materials needed to be indexed or searchable to constitute a printed publication, finding that accessibility was sufficient to establish that the materials qualified as printed publications. The Court also found that since the ACA materials were posted on a public domain source, there was no reasonable expectation that a user would not copy or distribute the ACA materials. The Court therefore held that the ACA materials were “in the possession of the public” and constituted prior art.

The Federal Circuit found no error in the PTAB’s claim interpretation and held that the record supported the finding that Jazz’s patented risk management system for tracking prescriptions was obvious. The Court agreed that implementing the ACA materials’ centralized database system on multiple computers, a feature taught in another prior art reference, would have been a predictable use of a known distributed data system according to its established function.

Specification Must Enable Full Scope of Claims as Construed

In an opinion addressing enablement under 35 USC 112, the US Court of Appeals for the Federal Circuit concluded that an asserted claim was invalid because the specification failed to enable its full scope, even though enablement as to the majority of claimed embodiments was undisputed. Trustees of Boston University v. Everlight Elecs. Co., Ltd., Case Nos. 16-2576, -2577, -2578, -2579, -2580, -2581, -2582, -2591, -2592, -2593, -2594, -2595 (Fed. Cir. July 25, 2018) (Prost, CJ).

Boston University (BU) sued Everlight for infringement of a patent directed to the preparation of monocrystalline gallium nitride (GaN) films via molecular beam epitaxy. The patent teaches providing a buffer layer between the desired GaN film and a substrate to prevent defects arising from a lattice mismatch between the GaN film and the substrate. During claim construction, the district court construed “a non-single crystalline buffer layer” to mean a layer of material that is either polycrystalline, amorphous, or a mixture of polycrystalline and amorphous. After a jury determined that Everlight infringed and had not proven the asserted claim’s invalidity, Everlight renewed its petition for judgment as a matter of law that the claim was invalid for lack of enablement, and the district court denied the motion. Everlight appealed.

Before the Federal Circuit, Everlight argued that the asserted claim was invalid because the specification does not teach one of skill in the art how to grow the monocrystalline GaN film directly on an amorphous buffer layer. At trial, Everlight’s expert testified that such an arrangement was impossible, and BU’s expert agreed. BU responded that others had grown monocrystalline GaN film directly on an amorphous buffer layer, so such an arrangement was not impossible. However, the Federal Circuit explained that the question presented was not whether the arrangement was possible, but whether the specification teaches one of skill in the art how to make the claimed device as of the patent’s effective filing date.

BU argued that the disclosure was sufficient because there was no dispute as to the enablement of five out of six permutations. The Federal Circuit disagreed, explaining that the specification must enable the full scope of the claims. While an artisan’s knowledge of the prior art and routine experimentation can fill small gaps, one of the claimed embodiments here required undue experimentation. The Court further noted that for purposes of infringement, BU had sought a construction that included the amorphous layer. Since BU wanted to exclude others from practicing what it regarded as its invention, the enablement requirement demanded that its patent teach the public how to make and use that invention.

Practice Note: Patentees should exercise caution when seeking a broad construction where the desired construction may ensnare embodiments not contemplated in the specification.

Attention Please: Still Looking for Predictable Rules to Determine Subject Matter Eligibility

The US Court of Appeals for the Federal Circuit affirmed a district court’s determination that claims directed to an “attention manager” display screen, but not limited to any system components for producing the claimed result, were not directed to patent eligible subject matter under 35 USC § 101. Interval Licensing LLC v. AOL, Inc., Apple, Inc., Google LLC, Yahoo!, Inc., Case Nos. 16-2502, -2505, -2506, -2507 (Fed. Cir. July 20, 2018) (Chen, J) (Plager, J, concurring in part, dissenting in part).

The district court invalidated Interval Licensing’s patent in an action brought for infringement against multiple parties. The parties agreed that the claims at issue were directed to the operation of an attention manager display screen but disagreed whether the claimed attention manager was a patent-ineligible abstract idea. Given the broad construction of the attention manager as recited in the claims, the district court found that the claims were directed to a system for presenting two non-overlapping sets of data but were not limited to any components for producing the claimed result, and granted summary judgment on the pleadings. The district court concluded that the claims were directed to an abstract idea of “providing information to a person without interfering with the person’s primary activity” but lacked a claimed inventive concept for implementing the abstract idea, noting that the claims did not recite how the attention manager solved the proposed problem arising in windowed operating systems. Interval appealed.

The Federal Circuit agreed that neither the specification nor the claims offered any clues on how the attention manager met the proposed construction; i.e., how the attention manager managed the display of acquired content in a manner that avoided overlapping with already displayed content with which the user was actively engaged. The majority followed recent § 101 Alice step one and step two analysis cases, finding that under step one, the act of providing someone with an additional set of information without disrupting the ongoing provision of an initial set of information is an abstract idea, and that the claimed instructions did not impose meaningful limitations on the purported solution of an attention manager that would improve a computer as a tool. Instead of claiming a solution that produced the claimed result, the claims in effect encompassed all solutions.

In its step two analysis, the Federal Circuit ticked down the list of recent decisions, finding, in part, that the recited instructions were at a high level of generality and were conventional, were not rooted in computer technology, and were without any specific distributed architecture. Using a conventional, pre-existing practice of acquiring information that will then be displayed somewhere (and somehow) adjacent to other information is not enough.

Judge Plager concurred in finding the claims patent ineligible based on the current state of the law, but dissented from the Federal Circuit’s “continued application of this incoherent body of doctrine.” Plager stated that exclusionary standards require concise guidance and equated determining when a claim is directed to an abstract idea with obtaining cultural consensus as to what qualifies as “obscenity.” Plager then questioned when a claim, reasonably determined to be abstract in a step one analysis, could then be determined to have become un-abstract in step two.

In Plager’s view, the “state of the law is such as to give little confidence that [any] outcome is necessarily correct.” The dissent complained that § 101 defenses are too often seen as a shortcut to quick dismissal, and courts are left with the task of attempting to resolve the criteria for patent eligibility. He suggested that courts consider deferring resolution of an “abstract idea” § 101 defense until validity is addressed under §§ 102, 103 and 112, at least until the issues can be addressed legislatively.

Entire Market Value Rule: Patented Feature Must Be Sole Driver for Consumer Demand

The US Court of Appeals for the Federal Circuit vacated a jury’s damages award, finding that the entire market value rule could not be used to calculate damages since the patented feature did not drive demand for the product. Power Integrations, Inc. v. Fairchild Semiconductor International Inc., Case Nos. 16-2691; 17-1875 (Fed. Cir. Jul. 3, 2018) (Dyk, J).

Power Integrations and Fairchild both manufacture power supply controller chips used in chargers for electronic devices, such as cellphones and laptops. Power Integrations owns a patent directed to switching regulators that direct power delivery and sued Fairchild asserting infringement of that patent. At trial, based on damages testimony that relied on the entire market value rule, a jury awarded Power Integrations approximately $140 million in damages. After trial, Fairchild moved for judgment as a matter of law, or in the alternative, a new trial, arguing that the damages award was not supported by substantial evidence and that the use of the entire market value rule was improper. The district court denied the motion. Fairchild appealed.

On appeal, Fairchild argued that the damages award should be vacated because it improperly used the entire controller chip, and not just the patented feature, as the royalty base. Power Integrations responded, arguing that its expert properly used the entire controller chip as the royalty base, thus satisfying the entire market rule since:

• The patented feature was essential to some customers.
• Some customers asked for the patented feature.
• Products with the patented feature outsold products without the patented feature.
• Technical marketing materials promoted the patented feature.

The Federal Circuit agreed with Fairchild, vacating the damages award and finding that when a product contains other valuable features, the patentee must prove that those other features did not influence purchasing decisions. The Court noted that both parties agreed that the accused products contained other valuable features, including technology that is the subject of a separate lawsuit over different patents. Given these other features, the Court concluded that Power Integrations “did not meet its burden to show that the patented feature was the sole driver of consumer demand, i.e. that it alone motivated consumers to buy the accused products.” The Federal Circuit explained that “the entire market value rule is appropriate only when the patented feature is the sole driver of customer demand or substantially creates the value of the component parts.”

Practice Note: Given the stricter “sole driver of demand” requirement outlined in Power Integrations, district courts are likely to be increasingly wary of allowing entire products to be used as the royalty base. However, it might be possible to apportion damages through the royalty rate while still using the entire product as the royalty base, as suggested by the Federal Circuit in Exmark Manufacturing Company Inc. v. Briggs & Stratton Power Products Group, LLC (IP Update, Vol. 21, No. 2) and Ericsson, Inc. v. D-Link Systems, Inc.

Walk Carefully at This Intersection: Willful Infringement ≠ Enhanced Damages

The US Court of Appeals for the Federal Circuit reversed an award of enhanced damages even while affirming a jury finding of willfulness (based on substantial evidence), explaining that the award was not adequately explained by the district court. Polara Engineering Inc. v. Campbell Company, Case Nos. 17-11974, -2033 (Fed. Cir. July 10, 2018) (Lourie, J). The Court also found that substantial evidence of experimental use trumped any public use bar.

Polara sued Campbell for infringement of its patent directed to a two-wire, push-button control system for crosswalk stations for pedestrian use at signal-controlled intersections. Polara’s Pedestrian Accessible Signal System (APS) produced visual, audible and tactile signals. Prior to the critical date, and subject to agreements with a municipality that did not include a confidentiality clause, Polara tested two prototypes that satisfied the limitations of the asserted claims. The early installation prototypes failed, and during the testing period, Polara made modifications to its system. A later prototype was installed in a Canadian municipality (subject to harsher weather conditions) pursuant to an agreement that did include confidentiality strictures. However, Polara witnesses testified that they did not tell anyone from the municipalities how the prototype worked, and that a person could not determine how the device worked once it was installed merely by looking at it.

After Campbell developed both a three-wire and two-wire APS, it consulted with patent counsel, who noted that at least one claim of the Polara patent was not limited to a two-wire system and that there were “areas of potential conflict” with the Polara patent.

At the district court, Campbell argued that the patent was invalid because Polara had tested prototypes prior to the critical date at public intersections. The jury found that the asserted claims were not invalid and that Campbell willfully infringed. The district court denied Campbell’s post-trial motion for judgment as a matter of law on validity, concluding that the invention was not subject to the public use bar, and granted Polara’s motion to enhance damages on the basis that five of the nine Read factors favored an award of enhanced damages, two of the factors weighed against enhancement, and two of the factors were neutral. Campbell appealed.

The Federal Circuit rejected Campbell’s public use argument, noting first that the bar is triggered where, prior to the critical date, the invention is in public use and ready for patenting. However, the bar is not triggered where an inventor tests the claimed features to determine if the invention works for its intended purpose, even if the testing occurs in public. The Court, quoting extensively from the venerable 1877 Supreme Court of the United States decision in City of Elizabeth v. American Nicholson Pavement, found there was substantial evidence to support the jury’s finding of experimental use because Polara needed to test the claimed features of the devices at actual crosswalks of different configurations to ensure they were safe.

The Federal Circuit also found that substantial evidence supported the jury’s finding of willful infringement. However, citing the 2016 Supreme Court cases Halo (IP Update, Vol. 19, No. 6) and WesternGeco, the Federal Circuit explained that the district court erred by not adequately explaining its decision to enhance damages:

After Halo and under Read, the “closeness of the case” remains a relevant consideration for determining the appropriateness of enhancement. Here, the district court awarded almost the maximum amount of enhanced damages, but did not adequately explain its basis for doing so, and failed to even mention Campbell’s public use defense, which presented a close question in this case.

The Federal Circuit reversed and remanded to the district court with instructions to provide a more complete explanation of its decision on whether to enhance damages, including a discussion of the public use defense.

Obviousness Cannot Be Predicated on What Is Unknown

The US Court of Appeals for the Federal Circuit upheld a district court finding that the patent challenger failed to prove that patents directed to a testosterone replacement injection therapy were valid and non-obvious. Endo Pharmaceuticals Solutions, Inc. v. Custopharm Inc., Case No. 17-1719 (Fed. Cir. July 13, 2018) (Chen, J).

Endo Pharmaceuticals holds the new drug application for Aveed, a long-acting injectable testosterone undecanoate (TU) formulation. Bayer Intellectual Property and Bayer Pharma own the two patents listed in the Orange Book for Aveed. In 2014, Custopharm’s predecessor in interest, Paddock Laboratories, submitted an abbreviated new drug application and a Paragraph IV certification. Endo and Bayer subsequently sued Custopharm for patent infringement.

The claims of the Orange Book-listed patents require three primary elements:

• 750 mg of TU
• A vehicle comprising 40 percent castor oil and 60 percent benzyl benzoate (the ‘395 patent only required a co-solvent rather than benzyl benzoate specifically)
• Administration at an initial interval of two injections four weeks apart and maintenance injections at 10-week intervals thereafter (this limitation applied to the asserted claim of one of the listed patents only)

Custopharm argued that the asserted claims were obvious based on three prior art references (collectively, the articles). The articles taught administration of 1000 mg of TU at a concentration of 250 mg/ml in castor oil. The articles, however, did not describe the use of a co-solvent, although it was known in the art in 2007 that the vehicle formulation used in the articles was 40 percent castor oil and 60 percent benzyl benzoate.

The district court found that Custopharm had not met its burden of proving that the disputed claims would have been obvious because (1) one would not have been motivated to lower the dosage of TU from 1000 mg to 750 mg, as required by the patent claims; (2) the articles did not inherently disclose benzyl benzoate as a co-solvent; and (3) the articles did not disclose the specific injection schedule of the ‘395 patent. Custopharm appealed.

On appeal, Custopharm argued that a skilled artisan would have been motivated to lower the dose of TU from 1000 mg (as disclosed in the articles) to 750 mg (as required by the patent claims), because under the American Association of Clinical Endocrinologists (AACE) Guidelines, four of 14 patients in one of these clinical studies were being overdosed. The district court found this evidence insufficient because under US Food and Drug Administration (FDA) guidelines, only one of these patients would have been considered overdosed, and it found that FDA guidelines are more prevalently applied than AACE guidelines. The Federal Circuit found no error in the district court’s determination that Custopharm failed to affirmatively demonstrate that a skilled artisan would have been motivated to lower the dose of TU despite no clear evidence of overdosing under the FDA guidelines. The Federal Circuit also found that Custopharm’s overdose theory improperly assumed that the only solution to overdosed patients was to reduce the dosage rather than extending the injection intervals.

Custopharm also argued that the vehicle formulation was “necessarily present” in the articles because (1) it was later revealed to be the actual formulation the authors of the articles used in their reported clinical studies, and (2) the articles provided a detailed recitation of the TU injection composition’s pharmacokinetic performance, and from this information the skilled artisan would have derived the claimed vehicle formulation of 60 percent castor oil and 40 percent benzyl benzoate. The Federal Circuit disagreed. With respect to prior art in an obviousness analysis, “[o]bviousness cannot be predicated on what is unknown.” While the inherent characteristic does not have to be recognized or appreciated by a skilled artisan, it must be either necessarily present or the natural result of the combination of elements explicitly disclosed by the prior art. Here, the Court found that the pharmacokinetic performance data was not enough to establish that the articles barred the possibility of alternative vehicles being used in the prior art compositions.

The Federal Circuit also found no errors in the district court’s finding that the articles did not disclose the claimed injection schedule. Custopharm argued that once a skilled artisan recognized that patients were being overdosed, the claimed injection schedule would be the result of routine treatment of individual patients and would thus be obvious. The Court found this argument unpersuasive, because (1) it was predicated on Custopharm’s overdose theory, which had already been rejected, and (2) read together, the cited art did not contemplate a two-phase dosing regimen with initial loading doses followed by maintenance doses.

Practice Note: This case highlights the difficulty in establishing obviousness based on an inherent characteristic in a prior art reference. To support such an inherency argument, it is important at trial to establish a clear factual record that demonstrates what is disclosed in the prior art reference that would prove that the inherent-undisclosed claim element was necessarily present.

Exploring the Waters of Motivation to Combine and Secondary Considerations

The US Court of Appeals for the Federal Circuit affirmed a district court’s obviousness determination, finding that if there is substantial evidence supporting a motivation to combine prior art references and the elements of a patent claim were used in the prior art for the same purpose, there is no genuine dispute as to the existence of a motivation to combine and weak evidence of secondary considerations cannot overcome a strong showing of obviousness. ZUP, LLC v. Nash Manufacturing, Inc., Case No. 17-1601 (Fed. Cir. Jul. 25, 2018) (Prost, CJ) (Newman, J, dissenting).

ZUP and Nash are competitors in the water recreational industry. ZUP owns a patent directed to a water recreational board, such as a wakeboard, in which a rider simultaneously uses side-by-side handles and side-by-side foot bindings to help maneuver between various riding positions. After Nash began selling its Versa Board, ZUP filed a lawsuit alleging infringement, trade secret misappropriation and breach of contract. After Nash filed a motion for summary judgment of invalidity, which the district court granted, ZUP appealed.

The Federal Circuit affirmed the district court’s findings that all of the elements of the claimed invention existed in the prior art. The Court also agreed that there was substantial evidence of a motivation to combine the elements of the prior art, given that the same elements of ZUP’s patent were used in the prior art for the same purpose, and concluded that there was no genuine dispute about the existence of a motivation to combine.

Turning to secondary considerations, the Federal Circuit found that ZUP’s minimal evidence of secondary considerations did not create a genuine dispute of fact sufficient to withstand summary judgement on the question of obviousness. The Federal Circuit held that weak evidence of secondary considerations cannot overcome a strong showing of obviousness. The Federal Circuit found that because the differences between ZUP’s claimed invention and the prior art were minimal, any long-felt need was also minimal.

Judge Newman dissented, arguing that the majority opinion’s decision was based on an incorrect application of the law of obviousness and was without regard to the principles of summary judgment. In particular, Newman stated that objective considerations of obviousness are not merely a rebuttal to overcome the other three obviousness factors, but must be fully considered with the other factors of obviousness, and that secondary considerations guard against hindsight where the inventor’s teachings are used as a template to render the invention obvious.

Claims Not Limited to Unrecited Aspect Unless the Intrinsic Record Shows Criticality

Addressing the construction of a claim directed to an energy-efficient lighting device, the US Court of Appeals for the Federal Circuit overturned a narrow district court construction that limited the claims to an unrecited feature described in the specification in favor of a broader construction. Blackbird Tech LLC v. ELB Electronics, Inc., Case No. 2017-1703 (Fed. Cir. July 16, 2018) (Moore, J) (Reyna, J, dissenting). The Federal Circuit found that the district court improperly limited the claims to a feature not characterized as being the invention itself or an essential element of it.

Blackbird sued ELB Electronics for infringement of a patent directed to a device used to retrofit an existing lighting fixture. In the patent specification, the device is described as having an attachment surface so that it can be installed onto a ballast cover of an existing lighting fixture. The preamble of the claim at issue calls for a lighting apparatus for retrofitting an existing light fixture, and the body of the claim recites a housing with an attachment surface and an illumination surface. The district court interpreted the claimed attachment surface to be a layer of the housing that is secured to the ballast cover. In response, Blackbird stipulated to non-infringement in order to appeal the district court’s claim construction.

On appeal, the Federal Circuit reversed. The Court first noted that the claim language did not expressly require the attachment surface to be secured to the ballast cover. The Court pointed to a separate claim limitation requiring the attachment and illumination surfaces to be fastened to each other and contrasted that explicit recitation with the lack of any such recitation regarding fastening to a ballast cover. The Court next looked to the intrinsic record for anything that would merit reading such a requirement into the claims. While the specification described fastening the attachment surface to the ballast cover, it did not refer to the particular fastening approach as being the invention or an essential element, or use any other language that treated this aspect as critical to the invention. Finally, the Federal Circuit found it notable that the claim had previously recited a fastening mechanism for securing the attachment surface to the ballast cover but that recitation was later removed by amendment. The Court thus construed attachment surface to be a layer of the housing to which the illumination surface is secured, which mirrors the separate claim limitation calling for a fastening mechanism that secured those two surfaces together.

Judge Reyna dissented based on the preamble language reciting the purpose of the device being to retrofit an existing light fixture having a ballast cover. According to Judge Reyna, the claim implicitly required the attachment surface to be secured to the ballast cover so that the claim scope would be appropriately confined to the disclosed invention.

CJEU Issues Landmark Decision on Patent Term Extensions for Medicinal Products

The Court of Justice of the European Union (CJEU) rendered a landmark decision extending patent term extensions for certain medicinal products in litigation relating to supplementary protection certificates (SPCs) for the blockbuster anti-HIV drug TRUVAD. Teva UK Ltd., et al. v. Gilead Sciences Inc., Case No. C‑121/17 (CJEU July 25, 2018) (Grand Chamber).

SPCs are special national intellectual property rights in the European Economic Area that extend the term of certain rights associated with patents granted for human or veterinary medicinal and plant protection products. An SPC does not extend the term of protection of a basic patent as such; the protection conferred by an SPC is rather limited to a certain product for which market authorization has been obtained. SPCs were introduced to compensate innovative parties for the significant time necessary to obtain such market authorizations.

The CJEU, sitting as a Grand Chamber comprising 13 judges, answered a request by the UK High Court for a preliminary ruling in proceedings between a group of generics manufacturers (Teva, Accord, Lupin and Mylan) and the US pharmaceutical company Gilead, which holds an SPC for TRUVADA. TRUVADA contains two active ingredients, tenofovir disoproxil and emtricitabine, which have a combined effect for the treatment of HIV. The generics manufacturers argued that Gilead’s TRUVADA SPC was invalid because Gilead’s relevant basic patent did not explicitly mention emtricitabine or a combination of emtricitabine and tenofovir disoproxil (while the patent did comprise a claim directed to tenofovir disoproxil as such). The argument was made because European Regulation No. 469/2009 concerning SPCs for medicinal products requires that the relevant basic patent protect the relevant product in order for an SPC to be granted (Article 3(a)). The generics manufacturers referred to the CJEU decision in Eli Lilly v. Human Genome Sciences (case C-493/12, Dec. 12, 2013), according to which the claims of the basic patent need not expressly mention the product protected by an SPC, but must at least refer to this product “implicitly but necessarily and specifically.” According to the generics manufacturers, this requirement was not fulfilled. Gilead countered that a basic patent protects a product as long as the relevant product falls within the scope of protection conferred by any claim of the basic patent. The UK High Court asked the CJEU what the criteria were for deciding whether a product is protected by a basic patent pursuant to Article 3(a) of Regulation No. 469/2009.

The CJEU ruled that a product comprising a combination of active ingredients is protected by a basic patent pursuant to Article 3(a) of Regulation No. 469/2009, even if the combination is not expressly mentioned in the claims of the basic patent, if the patent claims relate necessarily and specifically to that combination. The CJEU confirmed its decision in Eli Lilly v. Human Genome Sciences, but added that the relevant point in time for such test is the priority or filing date of the basic patent. From the point of view of a person skilled in the art, and on the basis of the prior art at the priority/filing date of the basic patent, two tests must be passed:

• The combination of the active ingredients must necessarily, in light of the description and drawings of the basic patent, fall under the invention.
• Each of the active ingredients must be specifically identifiable, in light of all the information disclosed by the basic patent.

Regarding TRUVADA SPC, the CJEU expressed doubt whether the two-part test could be met because, according to the UK High Court, there was no evidence that at the priority date of the relevant basic patent, emtricitabine was an effective agent known to the person skilled in the art for the treatment of HIV in humans. Therefore, a person skilled in the art may not have been able to understand how emtricitabine, in combination with tenofovir disoproxil, necessarily falls under the invention covered by the basic patent. The CJEU referred these factual questions back to the UK High Court.

Practice Note: This CJEU decision gives both innovative and generics companies an incentive to revisit questions of SPC validity. The decision may offer a starting point for generics manufacturers that seek to challenge the validity of an existing SPC and launch a generic product, because evaluation from a priority or filing date perspective may have an effect in favor of invalidity. While the CJEU has brought some long-awaited clarity regarding the new criteria that a basic patent claim must “relate implicitly but necessarily and specifically” to a product that is eligible for SPC protection, this rather factually difficult criteria will remain a part of European SPC law for the foreseeable future.

Tread Lightly: Tire Company’s Use of Competitor’s Mold Is Reverse Passing Off

Addressing a jury verdict concerning reverse passing off, fraud on the US Patent and Trademark Office (PTO), and trade dress validity and pleading, the US Court of Appeals for the Ninth Circuit affirmed the district court’s judgment in a case involving sellers of industrial tires, finding that defendant’s use of a competitor’s tire mold to make its own tires created a likelihood of confusion. OTR Wheel Eng’g v. West Worldwide Servs., Case Nos. 16-35897, -35936 (9th Cir. July 24, 2018) (Clifton, J).

OTR sold an industrial tire known as Outrigger and owned registered trade dress for the Outrigger tire tread design. West also sold industrial tires. West contacted OTR’s manufacturer about making a 355-size tire, and OTR’s manufacturer informed West that it would take months to complete a mold. West then asked OTR’s manufacturer to make 355-tires for it using OTR’s mold, but to buff out any identifying information. OTR’s manufacturer ultimately agreed to West’s proposal, and West sold tires made by using OTR’s mold. As a result, one customer stopped purchasing 355-tires from OTR and started buying them from West.

OTR sued West for reverse passing off, trade dress infringement and trade dress counterfeiting under the Lanham Act. At trial, the jury found West liable for reverse passing off, but not liable for trade dress infringement or trade dress counterfeiting. The jury also found that OTR’s tire tread trade dress was invalid and obtained through fraud on the PTO. The district court set aside the jury’s determination that OTR had obtained its trade dress registration through fraud, but otherwise entered judgment based on the jury’s verdict and ordered the PTO to cancel OTR’s trade dress registration. West appealed, and OTR cross-appealed.

Reverse passing off occurs when a manufacturer or seller of goods or services misrepresents someone else’s goods or services as its own. West argued that it could not be liable for reverse passing off because, under the Supreme Court of the United States Dastar decision, it merely copied OTR’s tire rather than passing it off as its own. The Ninth Circuit rejected that argument, relying on West’s requests to OTR’s manufacturer to use OTR’s tire mold and then West’s sale of those tires as its own. Given the substantial similarities between the two tires, the Ninth Circuit also found that the jury’s finding of a likelihood of confusion was supported by substantial evidence.

West argued that the district court wrongly set aside the jury’s finding that OTR committed fraud on the PTO in securing a trade dress registration for the Outrigger tire’s tread pattern. West pointed to two pieces of evidence to support its claim: a declaration from OTR submitted to the PTO showing that the Outrigger tire tread pattern had acquired distinctiveness, and an internal email touting the tire tread’s self-cleaning ability, indicating that the Outrigger tire tread was functional and not eligible for trade dress registration (or protection). The Ninth Circuit found that the declaration did not constitute fraud because, even if the statements in the declaration were unsupported, the PTO did not rely on the declaration registering OTR’s trade dress. With respect to the email suggesting the functionality of OTR’s trade dress, the Ninth Circuit rejected the argument that OTR had omitted any material facts from the PTO—indeed, OTR had already informed the PTO that the tread design made the tires self-cleaning and was only seeking to protect the angle of the tread with its registration. The Ninth Circuit thus agreed that the district court properly set aside the jury’s verdict on this claim.

The Ninth Circuit also affirmed the jury’s finding that OTR’s tire tread trade dress was invalid because it was functional or not distinctive. OTR argued that the jury found its trade dress invalid solely because the jury had found that OTR had committed fraud on the PTO, which was later set aside by the district court. The Ninth Circuit disagreed, finding there was substantial evidence to support the jury’s finding based on functionality.

Finally, the Court addressed OTR’s argument that the district court erred in refusing to instruct the jury on unregistered trade dress because OTR had failed to plead an unregistered trade dress claim. OTR argued that it had sufficiently pleaded such a claim by citing Section 43(a) of the Lanham Act (15 USC § 1125(a)), but the Ninth Circuit disagreed. Section 43(a) applies to registered and unregistered marks and trade dress, and the Court found that OTR had failed to put West on sufficient notice of its unregistered trade dress claim. The Ninth Circuit clarified that OTR’s unregistered trade dress claim was only barred to the extent it was broader than OTR’s registered trade dress claim.

The Public’s Right to Know

In a case involving publication of industry standards, the US Court of Appeals for the District of Columbia reversed a grant of summary judgment in favor of private organizations under the Copyright Act and Lanham Act’s fair use doctrines. American Society for Testing and Materials, et al. v. Public.Resource.Org, Inc., Case No. 17-7035 (DC Cir. July 17, 2018) (Tatel, J).

The issue began when Public.Resource.Org (PRO) purchased copies of industry standards from Standards Developing Organizations (SDOs), scanned them into digital files and uploaded them onto a public website. PRO is a nonprofit organization that makes available online a variety of public documents, such as federal rules about safety, government-produced videos and product designs. Several SDOs filed a lawsuit asserting that they owned the copyrights to the material uploaded by PRO.

The district court ruled that private standards setting groups can claim copyright ownership of industry standards documentation and granted summary judgment to the SDOs on their claims of direct copyright infringement, finding that the SDOs had valid and enforceable copyrights in the standards that PRO had copied and distributed, and that PRO failed to create a triable issue of fact that its reproduction qualified as “fair use.” The district court also determined that one of the SDOs was entitled to summary judgment on its trademark infringement claims because PRO had used copies of the organization’s marks in commerce in a manner “likely to cause confusion” and because PRO’s use of the marks did not qualify as a nominative fair use. The district court issued an injunction prohibiting PRO from all unauthorized use of the standards and trademarks. PRO appealed.

The DC Circuit vacated the injunction and remanded the case back to the district court. The Court found that the standards at issue were largely factual and that the amount used must be considered in the light of the public need being met, especially given that “precision is ten-tenths of the law.” The Court found that the district court erred in its application of the fair use doctrine and remanded to the district court to develop a fuller record regarding the nature of each of the standards at use, how they were incorporated, and the manner and extent to which they were copied by PRO.

Copyright in Data Compilations Is Thin

In a decision examining the extent of copyright protection provided to certain data compilations, the US Court of Appeals for the Ninth Circuit affirmed a summary judgment in favor of the defendant on copyright infringement claims raised by plaintiff, but reversed summary judgment on a state law trade secret claim, finding triable issues of fact. Experian Information Solutions, Inc. v. Nationwide Marketing Services Incorporated, Case No. 16-16987 (9th Cir. June 27, 2018) (Schroeder, J).

Experian compiles databases of information and licenses certain segments or collections of its data to other companies for use in their marketing campaigns. Experian’s ConsumerView Database (CVD) has been compiled by the company since 1998, and Experian owns a copyright registration covering the “selection, coordination, arrangement, and compilation of data” in the CVD. Based on the 250 million records of consumer data making up the CVD, Experian has found that specific pairings of names and addresses are one of the most lucrative components of the CVD when licensed to mail marketers.

In 2012, Nationwide, a small competitor in the database compiling industry, attempted to sell to Experian a compilation that Nationwide had acquired consisting of children’s birthdays combined with the name and addresses pairings of the children’s parents. When Experian compared the data to its own, it found that Nationwide’s data was identical to Experian’s at a match rate of 94 percent to 97 percent. This led Experian to conclude that the data had been stolen from it, and Experian filed a lawsuit against Nationwide for copyright infringement and trade secret misappropriation in Arizona district court.

The district court granted summary judgment in favor of Nationwide, concluding that Experian did not have a valid copyright or trade secret in the name and address pairing compilation. Specifically, the district court determined that the data compilation lacked sufficient creativity or originality to be eligible for copyright protection, and that the data pairings did not constitute a trade secret. Experian appealed.

First looking at the claim of copyright infringement, the Ninth Circuit set forth the boundaries of protection, noting that compilations of data fall somewhere in between facts, which are not copyrightable, and original works, which are. The Copyright Act recognizes that collections or compilations of facts may rise to the level of originality required for copyright protection. However, such copyright protection does not pertain to the data or facts themselves, but to the selection and arrangement of such facts made independently and with a minimal degree of creativity. Citing the Supreme Court of the United States’ 1991 decision in Feist, the Ninth Circuit noted that mere replication of alphabetical data in a telephone book was found to fall below the creative limit for copyright in a data compilation. The Court then looked at key circuit decisions that followed Feist to examine where courts have found sufficient creativity in the selection and arrangement of data compilations.

Based on its survey of the various circuit decisions, the Ninth Circuit distilled three general principles:

• Factual compilations are entitled to copyright protection so long as there is creativity in the selection, arrangement or coordination of the facts.
• The requisite creativity need only be minimal.
• The scope of protection in compilations is limited to the selection and arrangement, not to the underlying facts.

Applying these principles, the Court found that Experian’s name and address pairings were entitled to limited copyright protection because of Experian’s process in selecting, testing and culling accurate data pairs and then selecting which data to actually include in the database compilation for actionable, high-value results.

After deciding that Experian owned a valid copyright in the CVD, the Ninth Circuit agreed with the district court that Experian could not establish that Nationwide copied any protected material so as to constitute infringement. Because facts themselves can be copied, the Court explained that when dealing with a “thin” copyright in a compilation, the plaintiff must show “bodily appropriation” or virtually identical copying of the entire work. Since Experian had not introduced into evidence the version of its database that it claimed was copied, it had not established the necessary “bodily appropriation of expression” of the work by Nationwide.

The Ninth Circuit reversed the district court on the trade secret claim, however, finding triable issues as to whether the CVD had economic value as a trade secret that is not readily discernible to its competitors. Also, although Experian demonstrated that it maintained the secrecy of the CVD, thus making a prima facie showing that the collection qualified as a trade secret, the Court determined there were questions of fact as to whether Nationwide knew it was acquiring a trade secret through improper means when it purchased the original birthday data.

Yo Ho No: Lack of Express Language Scuttles Claim of Sovereign Immunity Waiver

The US Court of Appeals for the Fourth Circuit confirmed, consistent with rulings in other courts, that the Copyright Remedy Clarification Act does not validly abrogate 11th Amendment immunity, and that 11th Amendment immunity may only be waived if a state expressly consents to suit in federal court. Allen v. Cooper, Case Nos. 17-1522, -1602 (4th Cir. July 10, 2018) (Niemeyer, J).

Allen, a videographer, along with Nautilus, his video production company, obtained the rights to create footage and photograph Blackbeard’s pirate ship off the coast of North Carolina through a permit issued by North Carolina to the salvors of the ship. The permit gave the salvors the exclusive right to make and market all commercial narrative accounts of project-related activities undertaken by the salvors, but specifically provided that the agreement did not infringe the public’s right to access public records, including field maps, notes, drawings, photographic records and other relevant materials created or collected pursuant to the study of the site and recovery of materials therefrom. After capturing substantial video footage and still images showing the underwater shipwreck and the efforts of teams of divers to recover artifacts from the wreck, Allen registered these works with the US Copyright Office.

Subsequently, the North Carolina Department of Natural and Cultural Resources published some of Allen’s work on the internet without his consent, leading to a copyright infringement dispute that the parties settled pursuant to a settlement agreement. After entering into the settlement agreement, Allen and Nautilus alleged that the Department resumed publishing and/or displaying various videos about the shipwreck on the Department’s YouTube channel and published one of Allen’s still photographs in a newsletter, in violation of the parties’ agreement.

Allen and Nautilus then brought suit alleging violation of Allen’s copyrights. North Carolina filed a motion to dismiss under Rules 12(b)(1) and 12(b)(6) asserting sovereign immunity under the 11th Amendment. In response, Allen and Nautilus made three main arguments:

• North Carolina waived sovereign immunity in the settlement agreement.
• The federal Copyright Remedy Clarification Act of 1990 abrogated the State’s sovereign immunity.
• Ex parte Young provided an exception to sovereign immunity for ongoing violations of federal law.

After the district court rejected North Carolina’s claims of immunity, North Carolina filed an interlocutory appeal, and Allen and Nautilus filed a cross-appeal.

The 11th Amendment immunity protects states, their agencies and their officials from suit in federal court. In order to waive immunity under the 11th Amendment, a state must expressly consent to suit in federal court. The Fourth Circuit found that the settlement agreement between the Department and Allen fell short of the clear statement required to effect a waiver of 11th Amendment immunity. The agreement provided in relevant part:

In the event [North Carolina], Intersal [salvors], or [Allen and] Nautilus breaches this Agreement, [North Carolina], Intersal, or [Allen and] Nautilus may avail themselves of all remedies provided by law or equity.

This statement makes no reference to federal court (or any court) and states only that each party may pursue available remedies as provided by law or equity. Thus, the Fourth Circuit found that legal or equitable limitations on those remedies—including 11th Amendment immunity—must also apply under the agreement and, as a result, the agreement did not constitute a waiver of 11th Amendment immunity.

The Fourth Circuit further found that the Copyright Remedy Clarification Act does not abrogate a state’s 11th Amendment immunity. The Act provides in relevant part:

Any State, any instrumentality of a State, and any officer or employee of a State or instrumentality of a State acting in his or her official capacity, shall not be immune, under the Eleventh Amendment of the Constitution of the United States or under any other doctrine of sovereign immunity, from suit in Federal court by any person . . . for a violation of any of the exclusive rights of a copyright owner provided by [federal copyright law].

The Fourth Circuit reaffirmed that Congress cannot rely on its enumerated power in Article I’s Patent and Copyright Clause, which authorizes Congress to “secur[e] for limited Times to Authors and Inventors the exclusive right to their respective Writings and Discoveries,” to abrogate 11th Amendment immunity. The Court, relying on Florida Prepaid v. College Savings Bank (S.Ct. 1999), found that the language in the Act sweeps so broadly that it cannot be deemed a congruent and proportional response to the 14th Amendment injury with which it was confronted. Therefore, the Court concluded that the Copyright Remedy Clarification Act cannot validly abrogate the 11th Amendment.

Lastly, the Fourth Circuit found that Ex parte Young, which allows private citizens to sue state officials in their official capacities in federal court to obtain prospective relief from ongoing violations of federal law, does not apply in this case because North Carolina removed the allegedly infringing materials from the internet and there was no ongoing copyright infringement. The argument by Allen and Nautilus that there was the possibility of other infringing displays did not plausibly allege the existence of an ongoing violation of federal law, and thus Ex parte Young did not provide an exception to the 11th Amendment immunity claimed by North Carolina.

The Fourth Circuit reversed and remanded the matter to the district court with instructions to dismiss, with prejudice, the claims against state officials in their individual capacities, and to dismiss, without prejudice, the remaining claims.

Defendant Did Not Prevail Under Texas Statute Where Case Was Decided Under California Law

The US Court of Appeals for the Federal Circuit affirmed a district court’s denial of attorneys’ fees under the Texas Theft Liability Act (TTLA), explaining that the movant was not a prevailing party under the TTLA and thus was not eligible for fees under the act, because the trade secret claims were decided under California law, not Texas law. Raytheon Company v. Indigo Systems Corp., Case No. 16-2696 (Fed. Cir. July 12, 2018) (Chen, J).

Raytheon sued Indigo Systems and its parent FLIR Systems (collectively, Indigo) in federal district court in Texas alleging trade secret misappropriation of its infrared camera technology under both Texas and California law. After a prior appeal to the Federal Circuit and remand, Raytheon amended its complaint and asserted all of its trade secret claims under California law only. In the prior appeal, the Federal Circuit vacated the district court’s order denying Indigo attorneys’ fees, citing the 2009 Supreme Court of the United States decision in Ashcroft v. Iqbal, and its 2007 decision in Bell Atlantic Corp. v. Twombly. On remand, the jury ruled in Indigo’s favor on all trade secret claims, finding no misappropriation. Raytheon moved for judgment as a matter of law with regards to two of its trade secret claims and requested a new trial, while Indigo filed a renewed motion for attorneys’ fees under the TTLA. After all motions were denied, both parties appealed.

On appeal, the Federal Circuit found substantial evidence in the record to support the jury verdict that Indigo did not misappropriate Raytheon’s trade secret recipes for producing infrared lenses. Despite affirming the ruling in favor of Indigo, the Court nonetheless affirmed the district court and denied Indigo’s request for attorneys’ fees under the TTLA.

Under the TTLA, the prevailing party is mandatorily entitled to court costs and reasonable and necessary attorneys’ fees when the statutory requirements are met. In order to recover fees under the TTLA, the claimant must establish that (1) it actually prevailed on the merits of a TTLA claim, (2) the other party dismissed the TTLA claim with prejudice, or (3) the other party dismissed the TTLA claim without prejudice to avoid an adverse ruling on the merits.

The Federal Circuit first determined that Indigo was not a prevailing party under the TTLA because the trade secret claims were decided under California law. The Court further explained that even though Raytheon dismissed the TTLA claims without prejudice by amending its complaint, it did not do so to avoid an adverse ruling. Further, all parties understood that Raytheon was going to pursue its trade secret laws under either California or Texas law, and Raytheon made its decision to pursue its claims under California law after additional discovery. The Federal Circuit found no error in the district court’s conclusion that it was uncertain whether Raytheon’s withdrawal of the Texas-law claims was to avoid a bad outcome on the merits, or was for other choice of law reasons. Accordingly, the Court affirmed the denial of attorneys’ fees.